Pot Parsed From Deductible Expenses


As a general rule, it is illegal to traffic in marijuana, although California and some other states have legalized the use of marijuana for medical treatment. A California nonprofit benefit corporation that supplied medical marijuana to its members recently failed in its bid to deduct marijuana-related expenses but won a concession on deductibility of other expenses.

Members of Californians Helping to Alleviate Medical Problems Inc. paid an annual fee to receive benefits that included food, counseling, personal hygiene products and a limited amount of medical marijuana. Forty-seven percent of the members suffered from AIDS; the remainder had cancer, multiple sclerosis and other serious illnesses. On its final tax return for 2002, the taxpayer showed a $239 loss. The IRS denied all the nearly $213,000 in deductions because, it concluded, the taxpayer’s principal purpose was to traffic in marijuana.

IRC section 280E prohibits the deduction of all expenses and credits related to trafficking in controlled substances. Although the taxpayer objected to characterizing its activities as trafficking, the Tax Court applied a dictionary definition of the word and thus the restrictions of section 280E. The taxpayer also argued that its marijuana distribution was secondary to its care giving, for which deductions were not prohibited by section 280E. The Tax Court examined the scope of the care-giving activities and agreed they were a separate business from the drug trafficking, accounting for the majority of its expenses. Therefore, the taxpayer was allowed to deduct those expenses.

The Tax Court’s willingness to find two separate businesses—even though the clients of both were the same and the activities were all designed to help these individuals—may be beneficial to other taxpayers if other courts are willing to follow this conclusion. Numerous tax rules that require the existence of two or more businesses, such as partial liquidation and spinoffs, may be affected by this decision.

Californians Helping to Alleviate Medical Problems Inc. v. Commissioner , 128 TC no. 14 .

Prepared by Edward J. Schnee , CPA, Ph.D., Hugh Culverhouse Professor of Accounting and director, MTA Program, Culverhouse School of Accounting, University of Alabama, Tuscaloosa.


Year-end tax planning and what’s new for 2016

Practitioners need to consider several tax planning opportunities to review with their clients before the end of the year. This report offers strategies for individuals and businesses, as well as recent federal tax law changes affecting this year’s tax returns.


News quiz: Retirement planning, tax practice, and fraud risk

Recent reports focused on a survey that gauges the worries about retirement among CPA financial planners’ clients, a suit that affects tax practitioners, and a guide that offers advice on fraud risk. See how much you know with this short quiz.


Bolster your data defenses

As you weather the dog days of summer, it’s a good time to make sure your cybersecurity structure can stand up to the heat of external and internal threats. Here are six steps to help shore up your systems.